Around 1 in 5 of all mortgages are interest-only and the industry’s regulator is worried that consumers are at risk of losing their homes.
The Financial Conduct Authority (FCA) is urging people to speak to their mortgage providers if they don’t have any plans in place to meet the gap in paying of the amount that they borrowed.
An interest-only mortgage is a loan borrowed for a set term, secured against a property. As a borrower you benefit from cheaper monthly mortgage payments, but you are only ever paying the interest that is being charged on the amount borrowed.
At the end of the mortgage borrowers still owe their lenders the initial amount borrowed and should have financial plans in place, such as savings or equity, to be able to repay this amount in full, otherwise they’re at risk of losing their home.
In 2013, the FCA warned of interest-only mortgage maturity peaks. The mortgage maturity refers to the date of a final payment date of the mortgage. The first of which is happening now. The second and third are due in 2027/2028 then 2032 – the FCA warns that these people are at risk of being unable to repay their mortgage as they’re likely to be less well-off and generally have lower equity levels¹.
If you’ve got an interest-only mortgage there are a few steps that you can take now:
Establish your situationConsider if you have a plan, or have enough cash to pay off your mortgage once the term ends.
Speak to your lenderThis is the best thing to do if you’re worrying about your situation. Sometimes lenders allow you to extend the term of your loan which could allow you to have more time to save the money in order to pay it off. Alternatively, they might be able to offer you another option such as a part interest-only part repayment or even switching to a repayment mortgage.
If you plan to sellHouse prices are now slowing, so you could find yourself with negative equity; meaning that your home is worth less than the outstanding loan. If this is the case, speaking to an expert such as your mortgage lender will help you to understand your options.
Having an interest-only mortgage payment allows individuals to pay less per month, and could also allow individuals to bury their heads in the sand and ignore the looming payment once the mortgage matures, which is why it is important to take action now.
If you have other problem debts, that are preventing you from paying your mortgage repayments, then speak to PayPlan today for free, confidential debt advice on 0800 716 239 or visit www.payplan.com.